Oct. 12 (Bloomberg) -- India will end a 14-year policy of
solely depending on private capital to build major roads as it
grapples with infrastructure worse than Guatemala’s.

The government will award $2.3 billion of state-funded
highway contracts by the end of March after a credit crunch left
builders unable to find bank loans, Road Transport Minister C.
P. Joshi said Oct. 8 in New Delhi. India has previously relied
on construction companies funding new roads with loans, which
they then repay from income including toll fees.

The collapse in private bids has worsened congestion that
costs Asia’s third-biggest economy $5.5 billion annually and
leaves fruits and vegetables rotting on the way to market.
Traffic is so bad that trucks take 65 hours to travel the 1,374
kilometers (854 miles) between Mumbai and New Delhi and an
estimated 3.5 million cars and trucks will be sold this year.

“There is no way we can achieve the target for road
building unless the government figures out some way of funding
it,” said Manish Saigal, a partner for transport and logistics
at KPMG in Mumbai. “Liquidity has been a serious problem.”

Only 600 kilometer-lanes of projects have been awarded
since April 1, compared with a full-year target of 8,800
kilometers.

The need for direct state spending on highways marks a
shift from earlier this year when builders were paying the
government for the right to build and operate roads. The
companies were then confident they could make a profit on the
contracts, which generally run for 30 years, because of rising
traffic. The National Highways Authority of India won payments
for at least 32 projects in the year ended March 31.

Fading Optimism

That optimism has faded because of an economic slowdown,
said Shankar Raman, chief financial officer at Larsen & Toubro
Ltd., the nation’s biggest engineering company. Growth may drop
to a decade-low 4.9 percent this year, according to the
International Monetary Fund.

“There aren’t very many willing bidders today because they
are all stuck with aggressively bid projects,” Raman said.
“The government has been smart to realize the situation.”
Larsen didn’t overbid for projects, he said.

Local banks, which lent money for road projects worth 680
billion rupees last year, have also cut loans after reaching
lending limits imposed by the central bank, according to the
roads ministry.

Bank Talks

The government is talking to banks in a bid to revive
lending, Joshi said. Borrowing from overseas is difficult as
India faces the risk of a downgrade in its sovereign rating,
according to Mumbai-based Angel Broking Ltd.

“There have been some challenges in project financing,”
Joshi said. “Government spending will boost confidence.”

The government may also pay for some highways next fiscal
year, said A. K. Upadhyay, secretary at the Ministry of Road
Transport and Highways. It will also try to persuade the World
Bank and Asian Development Bank to lend money to private
builders, according to a ministry document.

Prime Minister Manmohan Singh is seeking to attract a total
of $1 trillion by 2017 for investments in roads, ports and power
plants as the country tries to improve infrastructure that’s
ranked 84th out of 144 markets worldwide by the World Economic
Forum. The nation could also save $12 billion a year in fuel
through better road, according to a study by Transport Corp. of
India and the Indian Institute of Management, Calcutta.

About 40 percent of India’s fruit and vegetables rot before
they are sold because of a lack of cold-storage facilities and
poor transport infrastructure, according to an estimate by
India’s Planning Commission.

Wider Roads

The state money, which will mainly come from bonds sold
last year, will pay for 4,000 kilometer-lanes of highways, Joshi
said. The work will be widening one-lane highways into two, he
said. India has about 20,000 kilometers of single-lane highways,
according to the roads agency.

The plan will benefit companies including Larsen and IRB
Infrastructure Developers Ltd., which have in-house construction
arms, more than infrastructure investors such as Reliance
Infrastructure Ltd. and GVK Power & Infrastructure Ltd., said
Vishwas Udgirkar, a senior director at Deloitte Touche Tohmatsu
India in New Delhi.

State funds “will help speed up infrastructure
development,” he said. “Construction companies will clearly
benefit.”

Asset Sale

The lack of access to credit means that builders are
selling assets to raise funds. Larsen, based in Mumbai, is
offering a stake in a road-building unit L&T Infrastructure
Development Project Ltd. to raise cash, Raman said.

Billionaire Anil Ambani’s Reliance Infrastructure plans to
offer as much as 25 percent of its shares, according to its
annual report. Punj Lloyd Ltd. will sell assets including
properties in six to nine months, Director of Corporate Affairs
Luv Chhabra said in August.

Larsen has surged 66 percent this year because of expansion
overseas and local rail and defense demand. That’s the best
performance on the BSE India Sensitive Index, which has risen 21
percent. The stock fell 0.2 percent to 1,650 rupees at close of
trading in Mumbai today.

India has relied on private funding for highway
construction since introducing a national development program in
1998. Highways carry about 65 percent of the nation’s freight
and 80 percent of passenger traffic. The government has always
paid for the land that the roads sit on, along with some
maintenance costs.

Government Goal

The roads agency has so far failed to meet a goal of
building 20 kilometers of highways a day that was set by the
government in August 2009. In about six years through October
2011, it oversaw 5,182 kilometers of construction, including new
highways and improvements.

This year, it has canceled tenders for at least four
projects, according to its website. The deadline for two other
projects, including a 114-kilometer highway in the southern
state of Tamil Nadu, have been extended at least three times.

“What’s important for general economic activity is that
investment should come back,” said Larsen’s Raman. “It
underlines commitment for infrastructure development and it’s
also good from a project point of view, because projects will
see the light of the day.”